Sterling’s fall has led to fears over a drop in demand and profits. Can higher exports compensate?

Everywhere Stephen Glancey looks, he finds Brexit and the sharp fall in the pound clouding his view. The chief executive of C&C Group, the makers of Magners cider and Tennent’s lager, makes half its revenues in sterling but its profits are reported in euros. Those “will take a dip”, he says.

Worse, he is worried that the weaker pound could leave customers with less money to spend on cider and beer. “There are signs the consumer has been holding back on spending since the referendum,” says Mr Glancey.

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C&C’s currency worries illustrate the unsettling effects of Brexit and the resulting downward pressure on the pound. Companies say they are having to rip up their plans as consumer demand seems to have stalled. Some worry this spells recession for the UK.

It is a far different scenario the UK finds itself in than just over a fortnight ago. In the trading hour after polls closed on referendum night, sterling peaked at $1.50, its highest level since December, as pollsters pointed to a victory for the Remain camp. The shock victory for Leave was felt in the immediate aftermath as foreign exchange traders rushed to sell the pound, graphically described this week by Bank of England governor Mark Carney as the “largest two-day fall against the dollar since floating exchange rates were reintroduced almost half a century ago”.A rally in sterling at the end of last week seemed to steady the markets. “There was the sense that we had the shock, but people were talking about the UK not actually exiting the EU, about Article 50 [the mechanism that starts the process to leave the EU] not being triggered,” says Bilal Hafeez, currency strategist at Nomura.But market fears returned this week and the pound resumed its decline, keeping it at 30-year lows close to $1.30. And its weakness has already done damage: Standard Life’s real estate fund was the first of a procession to freeze redemptions this week, and companies like C&C began to warn of the after-effects from sterling’s slide.“This week felt like the week when sterling was really going to impact on the economy,” Mr Hafeez says.

Moving downmarket

Sudden currency moves tend to be the preserve of politically unstable developing economies. The joke among some foreign exchange analysts was that the basket of emerging markets currencies — a group that includes Brazil, Russia, Turkey and South Africa — would soon be welcoming a new member.The sharp decline in the pound, while widely forecast as a potential consequence of Brexit, recalls previous precipitous falls in the currency.George Magnus, senior economic adviser at UBS, notes that major devaluations of the pound were “the norm” in the era before the 1944 Bretton Woods system of fixed exchange rates. In the 1980s, the oil price crash brought sterling close to parity with the dollar, and sterling plummeted again after the UK’s 1992 exit from Europe’s exchange rate mechanism. Most recently, it fell sharply after the 2008 financial crisis.

During many of those earlier devaluations, the weaker pound reinforced, or fed, the notion that the country itself was in decline. For those worried about the consequences of Brexit on the UK economy, the post-referendum 13 per cent decline in sterling against the dollar is just a foretaste of what is to come.“The market is a voting machine, and everybody is voting against the UK economy,” says Mr Hafeez.Some Brexiters argue that a weak pound will be beneficial to the UK, helping domestic businesses sell more goods abroad and improving Britain’s balance of payments. Andrea Leadsom, the pro-Leave candidate for the Conservative party leadership, says a weaker pound was “good for exports and it makes inward investment more attractive. It means we may import less and buy more at home. These are all good things for our economy.”Despite Mr Glancey’s other currency woes, he does see benefits for his Scottish export business. “We have had a number of enquiries in the last 10 days to export beer,” he says, noting that European competitors should now find selling into the UK tougher.Sterling’s weakness will certainly have other economies looking on with envy. In a global economy of low growth and low interest rates, a weaker exchange rate promises competitive trading advantages. But deliberate targeting of the exchange rate, in a move associated with “currency wars”, is now frowned on by the US and other G20 countries following their agreement in February to refrain from competitive devaluation. The UK has achieved it through the unwanted shock of Brexit.

A weaker pound proved desirable in the aftermath of the 1992 ERM debacle, Mr Magnus says. Interest rates were cut and sterling’s fall helped improve the UK’s balance of payments, spurring a recovery. What was dubbed “Black Wednesday” was later modified to “White Wednesday” by some economists.“The doom-and-gloom prognosis turned out to be crying over spilled milk,” he says. But Mr Magnus adds that the early 1990s was an era when sterling was already overvalued, China was emerging as a global world power, the IT boom was under way and the world was emerging from recession.

“They were very different times which bear no resemblance to the current situation,” says Mr Magnus.The current situation is one in which the UK finds one of its big structural weaknesses, its current account deficit, suddenly exposed by sterling’s fall, raising questions about the country’s capacity to continue to attract capital to help pay down the interest on that chronic debt.Sterling is a good case study in the problem of running persistent deficits over long periods of time, says Matthew Cobon, fund manager at Columbia Threadneedle. “Sterling benefited a lot during the European crisis as a destination for safe-haven capital. It had also been one of the best European economies from a headline growth perspective in recent years,” he says.“When these financial flows go quickly into reverse, the emperor is discovered to have no clothes.”

Mr Carney is preparing to reveal how he can mitigate Brexit’s impact, with a rate cut looking likely. But most market commentators think the BoE will be unable to stem the pound’s decline.On top of the deficit problem are worries about the UK’s access to exports markets, says Paul Lambert, head of currency at Insight Investment. “This is a potentially catastrophic position for the pound and the reason why we believe that most of the adjustment is likely to be in front of us and not behind us,” Mr Lambert says.

‘Competitive overnight’

One key to understanding the pros and cons of a falling pound is to establish what is motivating its fall.“If property funds are being liquidated and UK banks are declining massively, it’s a reflection of higher risk in the UK,” says Mr Hafeez. “But if it’s a reflection of the Bank of England easing policy and the UK economy slowing, that’s a good decline.”The only thing that is certain at present is uncertainty, and that is enough for currency strategists to revise down their sterling forecasts. The pound fell by 29 per cent in 1992-93 and by a third in 2007-08, so similar plunges would take the currency to between $1.13 and $1.22.But Mr Magnus and Mohamed El-Erian, chief economic adviser at Allianz, both go so far as to say that it was possible sterling could decline to parity with the dollar — uncharted territory. Much depends on the UK’s Brexit negotiations with the EU, says Mr El-Erian. “If the UK secures a comprehensive new free trade arrangement for goods and services, current levels will look very cheap,” he says. “If, however, such an arrangement lags behind or is not comprehensive enough, then current levels would be seen as the new normal for sterling.”Companies are having to adjust rapidly to a new era of sterling devaluation. One that is ahead of the game is Gear4Music, an online instrument retailer, which sells in eight currencies.Sterling’s decline allowed it to knock down the price of an electric guitar from €130 pre-Brexit to €119. The result, says chief executive Andrew Wass, has been a big spike in European sales since the vote. “Brexit made us pretty competitive overnight,” says Mr Wass.As Mr Glancey is finding at C&C, there are pros and cons to sterling’s big move. Gear4Music buys some of its products in dollars, while two-thirds of its sales are in the UK.The way to manage sterling’s convulsions is to react quickly to change. “I’m not worried. We have a very multicurrency business,” says Mr Wass.A flexible and nimble approach to Brexit is the recipe many believe the UK government needs in its negotiations with the EU. Those are precisely the ingredients that companies will need as the pound tumbles, but the outlook is treacherous.“The pound may get low enough, or UK assets may get cheap enough, that foreigners will want to buy them again,” says Mr Lambert. “But that journey is likely to involve a much weaker domestic economy. Ultimately, the country will have to decide whether that is a price worth paying.”

European Parliament President Martin Schulz and European Commission President Jean-Claude Juncker

The presidents of the European Parliament and the European Commission, Martin Schulz, 60, and Jean-Claude Juncker, 61, talk about the consequences of the Brexit vote, the failures of EU leaders and their early morning phone calls.SPIEGEL: Mr. Juncker, who was the first person you talked to after hearing the news of Brexit?Juncker: With Martin Schulz. He's in the habit of talking to me on the phone each morning between 7 and 8 a.m. It's a habit I sometimes wish he could drop.Schulz: I seem to remember it being between 6 and 7 a.m. I was shocked. In the days before the vote, I bet that the British would stay in the EU.Juncker: I put my money on Brexit. The EU Financial Stability Commissioner, Jonathan Hill from Britain, still owes me a pound. (Eds. Note: Hill announced his resignation from the Commission in the wake of the Brexit vote.)SPIEGEL: What did you say on the phone?Schulz: I said: "Jean-Claude, I think this isn't going well." Then I advocated for a quick response from the EU. The last thing we need right now is uncertainty.Juncker: I shared his opinion. It was important for the Brits to trigger Article 50 as quickly as possible in order to avoid any uncertainties. That was also the tenor of the press release the European Commission, Parliament and Council issued afterward.SPIEGEL: Just like on that Friday, you often present yourselves as extremely tight political partners. Can you appreciate that some in Europe see your relationship as cronyism?Juncker: Nonsense. Martin and I lead the two important community institutions, whose tasks include working together in confidence. After 30 years in Brussels, I can tell you: The relationship between the Commission and the Parliament has probably never been as good as it is now.SPIEGEL: That's precisely what many people find problematic. Parliaments are ultimately responsible for keeping governments in check -- not acting as their reinforcements.Schulz: There can be no talk of reinforcements. Jean-Claude and I are fully aware that we have different roles. There's also friction between us, for instance with the agreement for visa liberalization for Turkey. The Commission sent us a proposal. While 66 of our 72 conditions had been met, many of the most important ones had not been, including the reform of anti-terror laws. So we put the agreement on ice. The Commission very often has a very unpleasant time in Parliament.Juncker: I don't let it get to me. I said in my inaugural address that I am not the Council's secretary, nor am I the Parliament's lackey. That can sometimes lead to conflicts, which are defused through dialogue. Martin invariably knows what the Commission thinks, and I'm well informed about the sensitivities of the Parliament.SPIEGEL: The day after Brexit, Martin Schulz and Sigmar Gabriel, who is the head of Germany's Social Democratic Party (SPD), to which Schulz belongs, presented plans for sweeping reform in the EU. These plans foresee turning the Commission into a proper European government, one that is regulated by the European Parliament and by a kind of federal council of member states. The plan would mean a significant loss of power for member state governments. What do you think of the plan?Juncker: The proposal in and of itself is convincing, but it doesn't suit the times. To implement it, the European treaties would have to be amended. Martin's plan is a long-term project that cannot currently be implemented due to the mood on the continent. But where the community can achieve more on the basis of existing treaties, we should do so.Schulz: I completely agree with Jean-Claude. I'm fully aware that my vision of a European bicameral parliament can't be implemented tomorrow. I'm also not an integration fanatic. We agree: Brussels can't regulate everything. I'm driven by something else: There are forces in Europe that want to generally give national policy priority over a common European approach. We have to prevent this.SPIEGEL: Nevertheless, many in Europe see you as being symbolic of the backroom technocratic politics that is associated with the European Union and the euro. Some have even accused you of being responsible for Brexit. Do you plead guilty?Juncker: No, why should I? In the end, the British didn't vote to leave because of the euro. They're not even members of the currency union. Even the refugee crisis hardly affected the country. I have another explanation: In its 43 years of EU membership, Britain has never been able to decide whether it wants to fully or only partially belong to the EU.Schulz: Primary responsibility for Brexit lies with British conservatives, who took an entire continent hostage. First, David Cameron initiated the referendum in order to secure his post. Now, fellow conservatives want to delay the start of exit negotiations until they've held a party conference. And regarding detractors: I'm proud of the fact that Ms. Le Pen in France insults me and Mr. Wilders in the Netherlands calls me his opponent. The way I see it is, if these people weren't attacking me, I would be doing something wrong.SPIEGEL: Criticism isn't only coming from right-wing populists. Mr. Juncker, the Polish and Czech foreign ministers have called for your resignation. They feel the Commission is too domineering.Juncker: After these reports came across the wire, I spent hours sitting at the same table as the Polish prime minister at the European Council. She made no mention of any resignation. And the Czech prime minister assured me during a recent visit that he thought I should definitely stay in office.SPIEGEL: Do you deny that a number of Eastern European countries feel that the Commission has been too domineering -- with the specification that quotas be established for accepting refugees, for example?Juncker: I have a different understanding of the word "specification." Sure, the Commission suggested the quota, but it was the council of interior ministers that ratified it with a qualified majority. Furthermore, the Commission helped negotiate the agreement with Turkey and thus delivered the decisive contribution to solving the refugee crisis.SPIEGEL: Eastern Europeans see it differently. In their eyes, it was the border closures along the Balkan route that led to the numbers dropping.Juncker: Without the Turkey agreement, tens of thousands of refugees would still be stuck in Greece. The Commission presented proposals for securing Europe's external borders early on, but they languished in the Council for months. As you can see, the Commission isn't asleep. Oftentimes it has to wake up the others.SPIEGEL: Do you also need to be woken up, Mr. Schulz?Schulz: Not at all. It's long been routine that member states blame the Commission for everything they can't agree upon. The scapegoat is always Jean-Claude Juncker. Should I give you a few examples?SPIEGEL: Please.Schulz: The plan for a financial transaction tax has been ready for years, but the member states can't come to an agreement. To combat terrorism, the European Parliament hurriedly passed a law for gathering passenger data -- but it then took the interior ministers months to sign off on it while at the same time, the automatic exchange of data was rejected. Those are two examples among many. If cooperation among governments were the superior concept for progress in Europe, I'd be onboard immediately. But the problem is that cooperation isn't working.SPIEGEL: For the citizens of Europe, it's not that important who is to blame. What bothers them is the constant jockeying for power and jurisdiction and the fact that European processes are so lengthy and opaque.Schulz: It's true. For many people, politics in Brussels and Strasbourg might as well be happening on another planet. Just come to Brussels after a Council meeting. Do you know what happens? Every head of government holds his or her own press conference. They all say the same thing, in 24 languages: I was able to push through my agenda. And if the result is anything other than what they desired, the message is: Brussels is to blame. It has been this way for over 20 years. These messages stick with people, and that's deadly for Europe.Juncker: On top of that, there is a distorted perception of what goes on in Brussels. No one reports on the Commission taking a hundred initiatives from its predecessor off the table in order to shift competencies back to member state governments. Stories are invented: Juncker wants to introduce the euro everywhere or immediately deepen the EU -- although I publicly stated the opposite that same day. This doesn't just happen -- it happens in order to weaken the European institutions.SPIEGEL: What are you doing to stop it?Schulz: Not being opportunistic. It's not attractive at the moment to vouch for the European idea. I still do it, because I believe nothing would be better for our continent. Complementing the nation-state as it reaches its limits amid globalization: That is what Europe must offer.SPIEGEL: Mr. Juncker, you have always presented yourself as an admirer of the great European politician Helmut Kohl. But Kohl has been rather critical recently. Today, less Europe is more Europe, he said. And he criticized some people in Brussels who he said were confusing a united Europe with a uniform Europe. Do you feel as though he's talking about you?Juncker: Not at all. I completely agree with Helmut Kohl. I am not an advocate of the "United States of Europe," nor am I an integration fanatic. You can't deepen the European Union against the wishes of the European countries.SPIEGEL: Kohl also said Europe must return to being a community committed to stability and the rule of law. The former German chancellor was referring to the exceptions that you have granted to France, Spain and Portugal on euro-zone deficit criteria.Juncker: Those weren't exceptions. Rather, the Commission applied the Stability Pact as it is currently formulated. We no longer have the pact from 1997; it was radically amended in 2005 and the Commission is applying this Stability Pact with wisdom and rationality. France finds itself in a difficult economic situation and the government has taken several measures to bring order to the public budget. In doing so, France is conforming to the law. And the Commission is making decisions on the basis of applicable laws, which I recommend reading.SPIEGEL: You didn't justify the exceptions economically, but with the fact that presidential elections are soon to take place in the country.Juncker: I cannot recall the Commission ever referencing elections in any of its resolutions. It could be that some commissioners said something to that effect. It also wouldn't be prudent to slap a country down prior to elections. But that wasn't the reason for our decision. The reason was that the Stability Pact provides justification for this decision.SPIEGEL: The pact codifies limits of sovereign debt. France intends to exceed them. That's a clear violation, isn't it?Juncker: The pact allows for the consideration of positive forecasts when sanctioning earlier violations. That is why we will soon be speaking with the Portuguese and Spanish governments to ascertain whether the two countries have the willingness and the ability to get their economies structurally back on the right track.SPIEGEL: The free trade agreement with Canada, known as CETA, is also controversial. First, you said the final decision should be made by the EU. But then, after Sigmar Gabriel, the head of Germany's Social Democrats (SPD), called your approach "unbelievably misguided," member state parliaments are now going to be allowed a say in the decision. What was the reason for the about-face?Juncker: Your description isn't accurate. The fact is, according to a legal opinion from the Commission, this treaty is an EU-only treaty. But I'm not deaf and the Commission isn't operating in a parallel world of legal texts. That's why we decided to treat this agreement as a hybrid treaty. All EU heads of state and government have agreed with me that this agreement is the best that we could have negotiated. Now, they have the opportunity to show strong leadership and make the agreement their own.Schulz: Jean-Claude is right. The Canadian government made significant concessions on the controversial question of the dispute settlement courts and it recognized the norms of the International Labor Organization. Both were European demands that have now been pushed through. As such, CETA also set the standard for the upcoming trade talks with the US.SPIEGEL: You don't just agree on questions of European and trade policy. You have also emphasized that you are bound by a close personal bond. What is special about your friendship?Schulz: I agree with the aphorism: "Friends are those who stay when everyone else leaves." I have never been in a situation when companions have abandoned me. But I am certain that, were it to come to that, Jean-Claude would be there.Juncker: In politics, there are different categories of friendship. My friendship with Greek Prime Minister Alexis Tsipras, for example ...SPIEGEL: ... which was especially apparent at the height of the Greek crisis ...Juncker: ... I would describe that as a utilitarian friendship. At the time, his country was facing the prospect of leaving the euro zone and many Greeks felt abandoned by Europe. In such a situation, it seemed appropriate to me to present myself as a friend to Greece. It had to do with the country's dignity. My friendship with Martin, by contrast, is completely different in that it goes far beyond politics.SPIEGEL: How did it begin?Schulz: We got to know each other at an award ceremony in Aachen (Eds. Note: the prestigious Charlemagne Prize, awarded annually by the German city of Aachen). At the time, Jean-Claude was already an important man in Brussels. I was a young representative in the European Parliament. We talked for a long time and from that point on, our connection became increasingly deep. But our working-class origins are at least as important to our bond.Juncker: My father was a steel worker and Martin's grandfather was a miner in Saarland. In these occupations, there is a particular awareness of solidarity. That creates links that aren't present in other relationships.Schulz: There is an additional biographical parallel. Your father, Jean-Claude, was forcibly drafted into the Wehrmacht (Eds. Note: Germany's Nazi-era military). He was badly wounded and ended up as a prisoner of war in Russia. My mother's brother was killed while clearing mines in 1945. Those are things that mark your childhood and they help explain why we are so devoted to European unity.Juncker: I have always considered it to be a minor miracle that after the war, people in Europe's border regions were able to forget everything and, in accordance with the slogan "Never Again War," develop a program that still works today. It is always said that Europe is a project of the elite. That's incorrect. In fact, it was a concern of the soldiers who fought at the front, the concentration camp prisoners and the Trümmerfrauen (Eds. Note: The women in Germany who helped clear away the rubble following World War II). It was they who said, we're going to do everything differently now. De Gaulle and Adenauer merely acted upon this desire.SPIEGEL: Oskar Lafontaine, the former SPD leader who resigned as party leader in 1999 and moved to the Left Party in 2005, once said that there are no real friendships in politics, merely temporary alliances of convenience.Juncker: Lafontaine has certainly proved that he adheres to his own maxim.Schulz: I can understand Oskar. In political life, it is extremely difficult to remain loyal to a friendship when constellations of power or interests are in the way. I have friends in politics who really put the friendship to the test through their behavior.SPIEGEL: Which friends are you referring to?Schulz: It is an element of friendship that one not talk about everything publicly.SPIEGEL: Your friend Juncker has also disappointed you in the past. Following the most recent elections for the European Parliament, you agreed that he would nominate you as his Commission vice president. Were you angry with him?Schulz: Initially, yes. But then we talked about it. I told him, you promised me. He answered, that's true, but I can't keep my promise because I won't be able to push it through internally. I understood that. The most important thing is candor. In cases of lying and cheating, by contrast, the friendship usually comes to an end.SPIEGEL: It is part of politics that one sometimes must compete for a post against one's best friend. Is power ultimately more important than friendship?Schulz: Would I sacrifice a friendship to take a step forward in my political career? Thus far in my political career, I have been spared from having to make such a decision, thank God. And I can't imagine what it must be like.SPIEGEL: Have you ever done so, Mr. Juncker?Juncker: No, my friends have thus far protected me from such decisions. One can't allow blind loyalty to a friendship to lead one away from acting in the public interest. If Martin were to propose something that was totally absurd, our friendship would not prevent me from doing the opposite.

SPIEGEL: Have you ever had to reject a proposal from Schulz?Juncker: That we aren't always of the same opinion is something that comes up constantly. Then, we talk about it. Europe is a democracy and differences of opinion are part of it. The problem is: When two governments or institutions in Europe hold differing opinions, it is immediately a crisis. If in Germany the government, the Bundesrat (Eds. Note: Germany's second parliamentary body representing the interests of the states) and the state parliaments aren't in agreement, nobody questions the survival of the republic. I'm always quite amazed that people in Europe become unnerved when two institutions or two people have different views.SPIEGEL: In your friendship, do you also talk about private things?Schulz: Yes.SPIEGEL: Recently, there have been reports about the state of Juncker's health and his alcohol consumption. Have you talked about that?Schulz: Of course. We exchanged our aggravation over the platitudes that have been disseminated. Jean-Claude has one of the most stressful and difficult jobs. The fact that one sometimes seems tired is unavoidable. Many reports are obviously part of a political campaign, no doubt.SPIEGEL: What is your response, Mr. Juncker?Juncker: I said in Parliament that I am neither sick nor tired. Period.SPIEGEL: Mr. Schulz is approaching the halfway point of the legislative term as president of European Parliament and, according to the deal, the post must then be handed to a conservative. Are you also in favor of a change, Mr. Juncker?Juncker: I am in favor of the European institutions being led for the next two-and-a-half years as they have been thus far. We need stability.SPIEGEL: The conservative fraction, your fraction, may see things differently.Juncker: Europe is facing difficult times and at such a moment it is good for Brussels institutions to work well together. That works great at the moment with the two floor leaders, my friend Manfred Weber and my comrade Gianni Pittella, and the same holds true for Council President Donald Tusk. I don't see why we shouldn't continue with a proven team.SPIEGEL: Are you saying that as a politician or as a friend?Juncker: I am saying that as a politician and as a friend.SPIEGEL: Mr. Juncker, Mr. Schulz, we thank you for this interview.

LONDON – Until the people of the United Kingdom voted to leave the European Union, the refugee crisis was the greatest problem Europe faced. Indeed, that crisis played a critical role in bringing about the greater calamity of Brexit.

The vote for Brexit was a great shock; the morning after the vote, the disintegration of the European Union seemed practically inevitable. Brewing crises in other EU countries, especially Italy, deepened the dark forecast for the EU’s survival.

But as the initial shock of the British referendum wears off, something unexpected is happening: the tragedy no longer looks like a fait accompli. Many British voters have started to feel a degree of “buyer’s remorse” as the hypothetical becomes real. Sterling has plunged.

Another Scottish referendum has become highly likely. The erstwhile leaders of the “Leave” campaign have engaged in a peculiar bout of internecine self-destruction, and some of their followers have started to glimpse the bleak future that both the country and they personally face. A sign of the shift in public opinion has been a campaign, supported by more than four million people so far, to petition Parliament to hold a second referendum.

Just as Brexit was a negative surprise, the spontaneous response to it is a positive one. People on both sides of the cause – most important, those who didn’t even vote (particularly young people under 35) – have become mobilized. This is the kind of grassroots involvement that the EU has never been able to generate.

The post-referendum turmoil has highlighted for people in Britain just what they stand to lose by leaving the EU. If this sentiment spreads to the rest of Europe, what seemed like the inevitable disintegration of the EU could be instead creating positive momentum for a stronger and better Europe.

The process could start in Britain. The popular vote can’t be reversed but a signature collecting campaign could transform the political landscape by revealing a newfound enthusiasm for EU membership. This approach could then be replicated in the rest of the European Union, creating a movement to save the EU by profoundly restructuring it. I am convinced that as the consequences of Brexit unfold in the months ahead, more and more people will be eager to join this movement.

What the EU must not do is penalize British voters while ignoring their legitimate concerns about the deficiencies of the Union. European leaders should recognize their own mistakes and acknowledge the democratic deficit in the current institutional arrangements. Rather than treating Brexit as the negotiation of a divorce, they should seize the opportunity to reinvent the EU – making it the kind of club that the UK and others at risk of exit want to join.

If disaffected voters in France, Germany, Sweden, Italy, Poland and everywhere else see the EU benefitting their lives, the EU will emerge stronger. If not, it will fall apart faster than leaders and citizens currently realize.

The next trouble spot is Italy, which is facing a banking crisis and a referendum in October.

Prime Minister Matteo Renzi is caught in a “Catch-22” situation: if he cannot resolve the banking crisis in time, he will lose the referendum. That could bring to power the Five Star Movement, a partner of the pro-Brexit UK Independence Party in the European Parliament.

To find a solution, Renzi needs the assistance of the European authorities, but they are too slow and inflexible.

Europe’s leaders must recognize that the EU is on the verge of collapse. Instead of blaming one another, they should pull together and adopt exceptional measures.

First, a clear distinction must be drawn between membership of the EU and of the eurozone.

Those fortunate countries that are not members of the eurozone should not face discrimination.

If the eurozone wants to be more closely integrated, as it should be, it needs to have its own treasury and budget, to serve as a fiscal authority alongside its monetary authority, the European Central Bank.

Second, the EU should put its excellent and largely untapped credit to use. Leaders would be acting irresponsibly if they failed to employ the EU’s borrowing capacity when its very existence is at stake.

Third, the EU must strengthen its defenses to protect itself from its external enemies, who are liable to take advantage of its current weakness. The EU’s greatest asset is Ukraine, whose citizens are willing to die in defense of their country. By defending themselves, they are also defending the EU – rare in Europe nowadays. Ukraine is fortunate to have a new government that is more determined and more likely to deliver the reforms for which both its citizens and its outside supporters have been clamoring. But the EU and its member states are not providing the support that Ukraine deserves (the US is much more supportive).

Fourth, the EU’s plans for dealing with the refugee crisis need to be thoroughly revised. They are riddled with misconceptions and inconsistencies that render them ineffective. They are woefully underfunded. And they use coercive measures that generate resistance. I have proposed a detailed remedy for these problems elsewhere.

If the EU makes progress along these lines, it will become an organization to which people will want to belong. At that point, treaty change – and further integration – will once again become possible.

If Europe’s leaders fail to act, those who want to save the EU in order to reinvent it should follow the lead of the young activists in Britain. Now more than ever, the EU’s defenders must find ways to make their influence felt.

We are now at the point where the mainstream media has recognized that there is an Italian banking crisis. As we have been arguing since December, when we published our 2016 forecast, Italy’s crisis will be a dominant feature of the year. Italy has actually been in a crisis for at least six months. This crisis has absolutely nothing to do with Brexit, although opponents of Brexit will claim it does. Even if Britain had unanimously voted to stay in the EU, the Italian crisis would still have been gathering speed.

The extraordinarily high level of non-performing loans (NPLs) has been a problem since before Brexit, and it is clear that there is nothing in the Italian economy that will allow it to be reduced. A non-performing loan is simply a loan that isn’t being repaid according to terms, and the reason this happens is normally the inability to repay it. Only a dramatic improvement in the economy would make it possible to repay these loans, and Europe’s economy cannot improve drastically enough to help. We have been in crisis for quite a while.

The crisis was hidden, in a way, because banks were simply carrying loans as non-performing that were actually in default and discounting the NPLs rather than writing them off. But that simply hid the obvious. As much as 17 percent of Italy’s loans will not be repaid. As a result, the balance sheets of Italian banks will be crushed. And this will not only be in Italy. Italian loans are packaged and resold as others, and Italian banks take loans from other European banks. These banks in turn have borrowed against Italian debt. Since Italy is the fourth largest economy in Europe, this is the mother of all systemic threats.

Since the problem is insoluble, the only way to help is a government bailout. The problem is that Italy is not only part of the EU, but part of the eurozone. As such, its ability to print its way out of the crisis is limited. In addition, EU regulations make it difficult for governments to bail out banks. The EU has a concept called a bail-in, which is a cute way of saying that the depositors and creditors to the bank will lose their money. This is what the EU imposed on Cyprus. In Cyprus, deposits greater than 100,000 euros ($111,000) were seized to cover Cypriot bank debts. While some was returned, most was not. The depositors discovered that the banks, rather than being a safe haven for money, were actually fairly risky investments.

The bail-in is, of course, a formula for bank runs. The money seized in Cyprus came from retirement funds and bank payrolls. The Italian government is trying to make certain that depositors don’t lose their deposits because a run on the banks would guarantee a meltdown. A meltdown would topple the government and allow the Five Star Movement, an anti-European party, a good shot at governing.

The reason for the bail-in rule is Berlin’s aversion to bailing out banking systems using German money. Germany is already seeing a rise in anti-European political feeling with the rising popularity of the nationalist Alternative for Germany party. Unlike Italian anti-European sentiment, the German sense of victimization is their perception that they are disciplined and responsible, and they resent paying for the irresponsibility of others. Therefore, the German government’s hands are tied. It cannot accept a Europe-wide deposit insurance system as it would put German money at risk, nor can it permit the euro to be printed promiscuously, as that would come out of the German hide as well. The Italians can only try and manage the problem by ignoring EU rules, which is what they are actually doing.

But there is another European economic crisis brewing. As we have pointed out, Germany derives nearly half of its GDP from exports. All the discipline and frugality of the Germans can’t hide the fact that their prosperity depends on their ability to export and that the ability to export depends on the effective demand of their customers. Germany exports heavily to the EU, and the Italian crisis, if it proceeds as it is going, is likely to cause an EU-wide banking crisis, and an even greater weakening of the European economy. That would cut deeply into German exports, slashing GDP and inevitably driving up unemployment. Logic would have it that the Germans are acting desperately to head off an Italian default, but Chancellor Angela Merkel has built her government on Germany’s pride in its economy. She is not eager to announce to the German people that the German economy depends on Italy’s well-being.

But it is clear that German businesses are aware of the danger. German production of capital goods fell nearly 4 percent from last month, and German production of consumer goods rose only 0.5 percent. German consumption can’t possibly make up for half of Germany’s GDP. In addition, the International Monetary Fund has recently pointed to Deutsche Bank as the single largest contributor to systemic risk in the world. A rippling default through Europe is going to hit Deutsche Bank.

However, the real threat to Germany is a U.S. recession. Recessions are normal, cyclical events that are necessary to maintain economic efficiency by culling inefficient businesses. The U.S. has one on average once every six to seven years. Substantial irrationality has crept into the economy, including new bubbles in housing. The yield curve on interest rates is beginning to flatten. Normally, a major market decline precedes a recession by three to six months. That would indicate that there likely won’t be a recession in 2016 but there is a reasonable chance of one in 2017.

Given the stagnation in Europe, Germany has been shifting its exports to other countries, particularly the United States. It is hard to tell how much price cutting the Germans had to do to increase their exports, but it has been useful to maintain the amount of GDP derived from exports. If the United States goes into recession, demand for German goods, among others, will drop. But in the case of Germany, a 1 percent drop in exports is nearly a half percent drop in GDP. And given Germany’s minimal growth rate, drops of a few percentage points could drive it not only into recession, but into its primordial fear: high unemployment. A U.S. recession would not only hit the Germans, but the rest of Europe, which also exports to the United States, either directly or through producing components for German and British products. When we look at data on U.S. exposure to foreign debt defaults, there is some, but not enough to bring down the American system. The United States, with relatively low export percentages and low exposure, can withstand its cycle. It is not clear that Europe can.

Compounding this problem is an ever-increasing number of non-performing loans in China. Most of these are domestic loans, but they reflect the fact that China has never recovered from the aftermath of the 2008 financial crisis. It has avoided massive social dislocation by encouraging loans to businesses of all sizes and dubious viability in order to maintain employment as far as possible. There is a new wave of non-performing loans coming due. And as with Italy, non-performing is a euphemism. The problem is not that these loans are late. The problem is that they were loaned to businesses and individuals who should have been forced out of business by a lack of credit, and were kept alive on artificial respirators.

The obsession of figures like European Commission President Jean-Claude Juncker, railing against Brexit, was not a smokescreen. He and others really did see Brexit as the major danger to the EU. That is what is most troubling. Far more significant are Italy’s financial crisis and Germany’s extreme vulnerability. Whether the British stay or go, Italy’s and Germany’s problems have to be addressed, and the existence of the EU and its regulations make finding solutions extremely difficult.

This all was put in motion in 2008, but it is not a 2008 crisis. This is most of all a political and administrative crisis caused by a European system that was created to administer peace and prosperity, not to manage the complex gyrations of an economy. Similarly, China introduced the doctrine of enriching yourself to please the Party, but hadn’t considered what to do when the party was over.

The argument from those who are against internationalism is simple. Sometimes the major international systems begin failing. The less you are entangled with these systems the less damage is done to you. And given that such systemic failures historically lead to international political conflict and crisis, the case for nationalism increases – assuming you aren’t already trapped in the systemic crisis. In any event, increasing nationalism follows systemic failure like night follows day.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.